CINF earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1954 and has increased its quarterly cash dividend payments for 48 consecutive years. CINF earned two Stars in this section. The NPV MMA Diff of $14,964 is well above the level I look for. With a current yield of 5.98%, CINF exceeds the 4.61% long-term average MMA rate. Other: CINF is a member of the S&P 500, is an Achiever and an Aristocrat. S&P believes the company is a conservative underwriter with sound risk and capital management policies. CINF has improved its underwriting, investment results and profitability in recent years. However, CINF will face price competition in its core markets. CINF also has among the lowest rates of return on equity in its peer group. If industry consolidation activity increases, CINF could be viewed as a takeover candidate.
Linked here is a PDF copy of my analysis of Cincinnati Financial Corp (CINF) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: This insurance holding company markets primarily property and casualty coverage; it also conducts life insurance and asset management operations.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
CINF is trading at a discount to all the above. If I exclude the high and low valuation, and average the remaining two valuations, CINF is trading at a 50.9% discount. A Star is added since CINF is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
Conclusion: CINF earned a Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 4 Stars. This rates CINF as a 4 Star-Buy.
Using my [D4L-PreScreen.xls] model I determined the dividend growth rate could approach zero and CINF would still generate a NPV of MMA Differential close to the $3,000 that I look for from a company that is both an Achiever and an Aristocrat. Given the recent melt-down in the financial sector, most financials that have not cut their dividend are quantitatively grading out as Buy or Strong-Buy. Though interesting, CINF hasn't shown me enough to initiate a position in it.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I do not own shares of CINF (0.0% of my Income Portfolio).
What are your thoughts on CINF?
Recent Stock Analyses:
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It is with great pleasure that I, and our collective membership announce the debut of The Dividend Investing and Value Network (DIV-Net). Dividends4Life is proud to be a Founding Member of this new investing network focusing on dividend investing, value investing and a long-term buy and hold philosophy. The authors of The DIV-Net want this network to be the premier destination for readers interested in a variety of investing insight, stock analysis and perspectives that might otherwise be found fragmented across the web.
The DIV-Net is a unique network providing exclusive, original and unpublished content daily from a growing membership containing the best authors in the field. Seven Core Members are responsible for maintaining and administering The DIV-Net site and the DIV-Net network.
Our Core Members include:
We believe strongly in the virtues of dividend investing, value investing and a long-term buy and hold philosophy. Thus, we didl not want limit DIV-Net to just seven Core Members. In our aim to include as many bloggers interested in our core focus we created an Associate Membership. Associate Members are eligible to submit original unpublished articles to The DIV-Net, access to use DIV-Net's content on their site, participate in the aggregated feed and a site listing on The DIV-Net's Associates page.
Our Associate Members include:
In addition, DIV-Net sponsors a weekly carnival titled "Investing Carnival." The carnival's focus is on Value Investing, Dividend Investing and Long-term Buy-and-Hold Investing, as well as categories for real estate, commodities and other alternative investments. We welcome your relevant articles. To participate please submit your article here no later than 5:00 PM ET each Sunday. The Carnival will post every Tuesday. If you are interested in hosting, please e-mail dividendgrowthinvestor [AT] gmail [DOT] com.
At The DIV-Net we are dedicated to providing the best independent and original dividend, value, and buy-and-hold investing content available on the web. We strive to bring these views together in one community focused on the highest quality membership of authors available. It is our hope that publishing, reading, following, and participating in The DIV-Net will pay long-term dividends for all involved.
Join us at The DIV-Net, and see what all the excitement is about!
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To preserve the comparability, I do not like to make a lot of changes to my stock analysis template. However, I have identified a couple that I have considered and determined that they are worthy of being made. They are as follows:
Graham Number: In calculating the Graham Number I have traditionally used a trailing twelve months (TTM) EPS. it was suggested by some that I move to a trailing 36 months to mitigate the effect of any unusual item (positive or negative) over the last 12 months. A trailing 36 months would involve a lot of manual tracking. I have instead decided to err on the conservative side and use a minimum of the TTM or the last three full-year years average. Since I use tangible book value, my calculation of the Graham number is already more conservative than most. If a stock is selling below my version of the Graham Number it is a strong indication that it is undervalued.
NPV MMA Diff: In the past, I have made statement like "GE's NPV MMA Diff is less than the $10,000 I prefer. However, since GE is a Blue-Chip company with a long track record of success, I am comfortable with its NPV MMA Diff of $5,862." To bring a degree of consistency and order, I felt this needed to be quantified. Previously, a Star was awarded if the NPV MMA Diff was greater than $10,000. Now the $10,000 is lowered by $2,500 if the company is a member of the Broad Dividend Achievers™ (increased its annual regular dividend payments for the last 10 or more consecutive years). The $10,000 target is lowered an additional $5,000 if the company is a member of the S&P 500 Dividend Aristocrats (increased dividends every year for at least 25 consecutive years). Thus, a company that is both an Achiever and an Aristocrat, will only have to have a NPV MMA Diff of $3,000 to earn a Star. In effect this change is risk adjusting the target NPV MMA Diff. It will be higher for more risky companies and lower for those with a proven track record.
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Each Friday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al.
Below are the carnivals that I participated in this week, along with a link to my article:
Beginning next Tuesday there is a new weekly carnival titled "Investing Carnival." The carnival's focus is on Value Investing, Dividend Investing and Long-term Buy-and-Hold Investing, as well as categories for real estate, commodities and other alternative investments. To participate please submit your article here no later than 5:00 PM ET each Sunday. The Carnival will post every Tuesday. If you are interested in hosting, please e-mail dividendgrowthinvestor [AT] gmail [DOT] com.
Articles I enjoyed reading included (in no particular order):
Dividend Articles
The Wealth, Money & Life Network Featured Articles
Other Articles
There are some really good articles there, please take time and read a few of them.
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One area that many portfolios are lacking is international exposure. Most people feel more comfortable buying the companies they are familiar with, which is understandable. However, we still need some exposure to international equities. I too need to bolster my position in non-U.S. equities.
In my Asset Allocation portfolio, I hold IShares MSCI EAFE Index Fund (EFA) as the international component. In my 401(k), there is an international fund that I am invested in. Certain other funds that I own have an international component. The remainder of my exposure comes from holding ADRs of international companies such as BP (BP).
Based on preliminary numbers, my allocation to international equities has increased about 1% from the end of Q1, but it is not where I would like it. To help accelerate the increase I plan on adding an international ETF to my Income ETF portfolio. I am in the preliminary stage of identifying candidates and here are the ones I have on the list to look at (yields as of 6/20/08):
DEB - WisdomTree Europe Div Fund - 2.48% Yield (Annual)
The Fund seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Europe Dividend Index. The WisdomTree Europe Dividend Index measures the performance of companies incorporated in 16 developed-market European countries that pay regular cash dividends on shares of common stock.
DWM - WisdomTree DEFA Div Fund - 1.49% Current Yield (Annual)
The Fund seeks to track the price and yield performance of the WisdomTree Dividend Index of Europe, Far East Asia and Australasia. The Index measures the performance of companies in developed markets outside of the U.S. and Canada that pay regular cash dividends on shares of common stock.
DWX - SPDR S&P International Dividend - 14.42% Current Yield (Quarterly)
The Fund seeks to replicate as closely as possible, before expenses, the price and yield performance of an index that tracks exchange-listed common stocks domiciled in countries outside the United States that offer high dividend yields.
IDV - IShares Dow Jones EPAC Slct Dvdnd IndxFd - 9.18% Yield (Quarterly)
The Fund seeks investment results that correspond generally to the price and yield performance of the Dow Jones EPAC Select Dividend Index. This Index is comprised of one hundred of the highest dividend-yielding securities (excluding REITs) in the Dow Jones World Developed-Ex. U.S. Index.
FDD - First Trst DJ STOXX Slct Dvdnd 30Indx Fd - 4.68% Yield (Quarterly)
The Fund seeks investment results that correspond generally to the price and yield of an equity index called the Dow Jones STOXX(R) Select Dividend 30 Index.
PID - PowerShares Intnl Dividend Achievers Ptf - 3.93% Yield (Quarterly)
The Fund seeks to match the performance of the International Dividend Achievers Index by investing at least 90% of its total assets in dividend paying common stocks of this index. This index tracks the performance of dividend paying American Depositary Receipts or ordinary stocks trading on the NYSE, NASDAQ or AMEX.
These will provide a good starting point for additional research. I will provide updates as I move forward with the research.
What securities are you using to provide international exposure?
At the time of this writing I held positions in BP and EFA.
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It seems lately that the headlines are dominated by companies dropping their dividends such as Fifth Third (FITB) from $0.44 to $0.15, KeyCorp's (KEY) Board expressed its intention to reduce its dividend 50% to an annualized dividend of $0.75/share, FairPoint Communications (FRP) lowering their dividend 35% and Crystal River Capital (CRZ) cutting its dividend from $0.68 to $0.30. Not all the news is bad.
Consider the following companies that recently announced double-digit dividend increases:
Unfortunately, after running these companies through my [D4L-PreScreen.xls] model none of them warranted additional consideration. CAT was the closest with a NPV of MMA Differential of (621) .
On June 19, 2008, BB&T Corporation (BBT) stated that the company's capital levels remain strong and management anticipates "some increase in the cash dividend during 2008."
And finally, sometimes good news is found in maintaining the status quo. According to Bloomberg, Bank of America's (BAC) CEO told Oppenheimer analyst Meredith Whitney the company's dividend was safe. With an effective yield between 8% and 9%, and trading less than book value, BAC could end up as one of the great steals of 2008. Time will tell.
At the time of this writing, I owned BAC and BBT.
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Linked here is a PDF copy of my analysis of Procter & Gamble Co. (PG) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. PG is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, PG is trading at a 6.2% discount. A Star is added since PG is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. PG earned two Stars in this section for 3.) and 4.) above. It has paid a cash dividend to shareholders every year since 1891 and has increased its quarterly cash dividend payments for 52 consecutive years. The "1-Yr. > 5-Yr Growth" metric indicates that PG's dividend growth has experienced acceleration.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. Unfortunately, PG earned no Stars in this section. The NPV MMA Diff of $2,265 is is below the level I like to see for a blue-chip company. The 11 years needed for the dividend income to equal a MMA paying the long-term average rate of 4.61% is one more then the 10 years maximum I like to see.
Other: PG is a well-managed company that produces consumer staples. PG's ability to consistently grow its dividend over different economic cycles has made it a staple in most dividend investors portfolio. The risk of PG experiencing a significant downturn is less than most companies since demand for household and personal care products is generally stable and not affected by changes in the economy or geopolitical factors.
Conclusion: PG earned a Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned no Stars in the Dividend Income vs. MMA section for a net total of 3 Stars. This rates PG as a 3 Star-Hold.
PG is one of those Blue-Chip stocks that I would love to have in my portfolio. It has made significant strides since I reviewed it back in February. At that time it rated as a 0 Star-Avoid stock. What's changed? At that time it was selling for $66.21 vs $63.13 today; it has increased its dividend resulting in a current yield of 2.47% now vs 2.12% in February. The NPV MMA Diff is now $2,265 vs a negative $900 in February.
Am I ready to buy? Not quite, but it is getting very close. Using my [D4L-PreScreen.xls]model I determined that a price of $58.11 would lower the "Years to >MMA" to 10 and increase NPV of MMA Differential to over $3,000. I would be very comfortable initiating a position between $58 and $60.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I do not own shares of PG (0.0% of my Income Portfolio).
What are your thoughts on PG?
Recent Stock Analyses:
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Linked here is a PDF copy of my analysis of BB&T Corporation (BBT) (alt1, alt.2). Below are some highlights from the above linked analysis:
Company Description: The BB&T Corporation operates as a holding company for Branch Banking and Trust Company that provides commercial banking and trust services for small and mid-size businesses, public agencies, local governments, and individuals in the United States.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. BBT is trading at a discount to all the above valuations. If I exclude the high and low valuation, and average the remaining two valuations, BBT is trading at an astounding 31.3% discount. A Star is added since BBT is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. BBT earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1903 and has increased its quarterly cash dividend payments for 36 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. BBT earned both Stars available in this section. With a 7.56% current yield, BBT is paying well in excess of the long-term average money market rate of 4.61%. BBT's NPV MMA Diff is $17,688.
Other: BBT is a member of the S&P 500, a Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. S&P commented that BBT has strong credit quality in its loan portfolio, and a good history of profitability. In a difficult operating environment, BBT has grown commercial and industrial lending, while maintaining acceptable credit quality and funding growth. BBT is exposed to the Florida housing market, but the company has said it has not made loans to the riskiest segments of the Florida housing market, such as condominium developments.
Conclusion: BBT earned a Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 4 Stars. This rates BBT as a 4 Star-Buy.
Last week after analysts speculated that BBT would cut its dividend, the company issued a statement reaffirming an earlier assertion that the company's capital levels remain strong and management anticipates "some increase in the cash dividend during 2008." Based on the above analysis, I would be comfortable adding to my BBT position, as my allocation and valuation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of BBT (1.9% of my Income Portfolio).
What are your thoughts on BBT?
Recent Stock Analyses:
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It is the two items we are the most sensitive about. On Monday they get your money, then on Tuesday they go after your personal goods. One makes bold statements, while the other is very familiar. Both have been luring you for over a hundred years. Will either find a place in your heart, or more importantly, will they find a place in my dividend portfolio? Stay tuned...
Next Sunday on the D4L Channel we will interrupt our regularly scheduled programming for an announcement of epic proportions! This is one you will not want to miss.
It's been an exciting week! Next week is going to be another exciting one. Don't risk missing a minute of it. You can have it all packaged and delivered directly to you free by clicking here and subscribing to the D4L Channel.
While waiting for this week's thrillers. You may want to tune in to a few of these classic episodes:
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Addiction can be a powerful thing. According to Wikipedia, addiction is a term used to describe a devotion, attachment, dedication, inclination, etc. Nowadays, however, the term addiction is used to describe a recurring compulsion by an individual to engage in some specific activity, despite harmful consequences to the individual's health, mental state or social life.
I think it is safe to say a lot of people are addicted to micro-managing their portfolio. It's not that they check the results each day, but they'll keep their portfolio open in a browser to monitor it throughout the day. In the short-term, markets can behave very irrationally. If you are constantly watching your portfolio, this can lead you to act out of emotion - e.g. sell a good security at a bad price or buy a good security at a bad price.
The cure? Do your homework and select solid companies with a proven track record. Watching every up and down tick of good companies like Aflac (AFL), General Electric (GE) and Johnson & Johnson (JNJ) will not help your portfolio's long term-performance.
One test of addiction is can you walk away from something without withdrawal? During my vacation last week I thought it would be an interesting test to see what I could and couldn't walk away from. On the positive side, I did not check my portfolio a single time. I did not even watch the news to see what the markets did.
Being an admitted workaholic, I did check emails and voicemails multiple times a day. This was no surprise. However, I have identified a new addiction - my blog. In spite of having a full weeks worth of posts scheduled ahead of time, I checked my blog as much as I checked my work emails and voice mails.
Hello, my name is D4L and I am a blogaholic...
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Each Friday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al. There are some really good articles there, please take time and read a few of them.
Below are the carnivals that I participated in this week, along with a link to my article:
Articles I enjoyed reading included (in no particular order):
Dividend Articles
The Wealth, Money & Life Network Featured Articles
Other Articles
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In life there are precious few things that are lily pure in which nothing negative could rightfully be said about them. I am not foolish enough to believe that dividends are the ultimate panacea. Join me today as don myself in black and explore the the Dark Side of Dividends.
Here are the top five reasons for not paying a dividend:
Black is just not my color. I prefer my white hat (with a crimson script A, of course). Here are my five responses to the above:
Though not perfect, dividend distributions meet a very specific need for investors looking for a reliable and growing revenue stream. Not all companies that pay a dividend are good dividend investments. Investors must do their due diligence prior to purchase.
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They are now past retirement age, but they will never retire. Their finances are in a shambles. They still take 3 vacations a year, and somehow find a way to stay a few steps ahead of their creditors and the tax man, but the gap is closing quickly. The lucrative jobs they had years ago are not what they once were. Their home equity is depleted, and their house is in desperate need of repair. Their family is growing tired of having to bail them out just before the house is seized and sold by the bank. How did they end up in this position?
For decades I have watched this family make bad decisions - financially and otherwise. I have watched from the sidelines powerless to effect a change in their lives. Since Dividends4Life is financial in nature, I thought it would be useful if I shared some of my observations of how this family lived.
Bill and Jackie (not their real names) were your typical middle class family. Bill worked in construction and earned a decent living, while Jackie stayed at home to raise the kids. Jackie was a fun-loving city girl while Bill was content country boy.
Like most families, the early years were tough - the paycheck covered the expenses with very little left over. Being the fun-loving type Jackie encouraged Bill to join her at the neighborhood bar. From there Bill developed an expensive drinking addiction that has grown over the years. When Bill is at home he constantly has a beer in his hand, and will go through a couple of cases over the weekend. After decades of heavy drinking Bill's speech is slurred and it is difficult for someone who does not know him to understand him.
Soon the trips to the local bar were not enough excitement for Jackie. She talked Bill into vacationing at the beach. At first Bill did not care much for the beach, but like the bar he eventually became addicted to it. Over the years, one yearly beach vacation grew into three. There was a dog track near where they vacationed. It offered another form of excitement for Jackie, and a new addiction for Bill.
Bill started doing side jobs on the weekend in an effort to support the family's lifestyle. The more Bill earned, the more Jackie spent. Soon the weekend side jobs became a permanent part of Bill's life. Jackie began to fret when it rained and Bill couldn't work.
When their kids left, Jackie took a job as a real estate agent. Over the last several years when real estate was hot, Jackie did well and helped to fund their lifestyle. In addition, she has learned a new trick - refinancing her home and withdrawing equity.
Now the economy is slowing there are fewer construction jobs for Bill and no one is buying houses. Bill and Jackie's health is starting to fail. All they have is social security and have found it does not support the lifestyle they have grown accustomed to, so they are both still working.
Many tried to warn Jackie, but she was strong-willed, had all the answers and would listen to no one. She is now running out of answers. Over the years she has learned to finagle her finances, but her margin of error is quickly diminishing. A crash is inevitable.
Life is a choice. You can choose how you live, but you cannot choose the consequences of how you live.
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This week (June 9th) we are vacationing in Florida, so my posts may be more introspective as I have time to stop, think and reflect on life, family, success and what is really important. My kid's good friends will be moving to another state next month, so we invited them along on our vacation. I have enjoyed watching their interactions.
As most 11 year old boys are apt to do, my son and his friend tormented their older sisters. The girls took it well. At 13, the girls are too "mature" to retaliate. From my perspective, the most interesting interactions were between the boys.
My son loves to wrestle. Whenever a boy comes over, 10 minutes does not pass before my son is trying to talk him into wrestling. At first we were concerned that he was just wanting to fight or use some of the Jujitsu techniques on some poor unsuspecting boy. But after watching some of these wrestling matches, I am less concerned. Before starting, my son explains the ground rules and the release signals, both verbal and non-verbal. The wrestling match becomes more of a teaching exercise where my son trains the other boy to execute some of the Jujitsu techniques he has learned.
When playing video games, the boys would write down the score after each round to determine who the winner was. I found it interesting that when the boys were playing the games my son was best at, he would tutor the other boy as he played. I knew what he was doing, but I wanted to hear him say it, so I asked, "why were you helping him when the score was so close, don't you want to win?" He replied, "Sure I do, but if my friend is not playing his very best, then the win wouldn't mean as much." Soon his friend starting tutoring my son on the games he was better at and the wins meant more to each boy when the other was playing at a higher level.
Society has dumbed things down where "everyone is a winner", but with a lower bar has anything really been accomplished? Winning is important, but how you win is even more important. I have never subscribed to winning at all costs. Win with class and build up your competitors. This will raise their level of play, force you to be better, and they may in turn build you up. Would you rather dominate an inferior opponent, or edge out someone who is running the race of their life?
There is nothing wrong with everyone being a winner, but let's raise, not lower, the bar and win on a higher level. If everyone finishes better than they started, then isn't everyone a winner?
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Linked here is a PDF copy of my detailed analysis of Paychex Inc (PAYX) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. PAYX is trading at a discount to all but 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, PAYX is trading at an astounding 30.7% discount. A Star is added since PAYX is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. PAYX earned two Stars in this section for 2.) and 3.) above. PAYX has paid a dividend since 1988 and has increased its dividend for the last 18 years (calendar year).
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. PAYX earned both Stars available in this section. If PAYX grows its dividend at 17.6% per year, it will only take 3 years to equal the long-term average money market rate of 4.61%. PAYX's NPV MMA Diff is an eye-popping $72,195.
Other: PAYX is a member of the S&P 500, is an Achiever, but is not an Aristocrat. The company has a strong balance sheet and generates a steady stream of cash. Risks to PAYX include the highly competitive nature of the outsourcing industry, low barriers of entry and the threat of alternative products. ADP, the industry leader, is promoting a payroll and tax software solution using Microsoft's small business software. This could potentially affect Paychex's growth in the small office market.
Conclusion: PAYX earned a Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 5 Stars. This rates PAYX as a 5 Star-Strong Buy.
I don't think PAYX can sustain a 17% dividend growth rate in the near-term. Using my [D4L-PreScreen.xls] model I have determined that the growth rate can fall to 10.8% and PAYX will still generate the $10,000 NPV MMA Diff that I am looking for. Entering the 10.8% dividend growth rate into my [20-Year-DCF.xls] model and setting the EPS growth rate to 10.8%, the calculated fair-value of PAYX is $35.13, slightly above Friday's $33.65 closing price.
Historically, PAYX raises its dividend in August with a July declaration date. Based on the above analysis, I am comfortable adding to my PAYX position, as my allocation and valuation allows, but I will likely wait until after the next dividend declaration.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of PAYX (2.8% of my Income Portfolio).
What are your thoughts on PAYX?
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All this week, we are on location in sunny Florida with a lot of different exciting events planned! Monday, we are up close and personal with the most popular person in the workplace! On Tuesday, we'll be covering a race more exciting than the Daytona 500. Wednesday in the Lifestye section, we'll be looking at some tough choices. Then Thursday... we turn to the dark side... Do we make it back? Only one way to find out... Stay tuned...
It's going to be another memorable week. Don't risk missing a minute of it. You can have it all packaged and delivered directly to you free by clicking here and subscribing to the D4L Channel.
While waiting for this week's thrillers. You may want to tune in to a few of these classic episodes:
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"It's not the will to win that matters - everyone has that. It's the will to prepare to win that matters."
-- Legendary Alabama Coach Paul "Bear" Bryant
We all want to succeed in one way or another. Some want to be great athletes, some want to excel in business, while others want to dominate the stock market.
A great number of people in our society jump from "desire to succeed" to "living like they have". Kids out of college, often will buy an expensive car with their first paycheck. A small bonus at work will often lead to an extravagant vacation. It is no wonder that there are so many people in financial trouble today. They are missing something in the middle.
"Desiring to succeed" and "living the good life" are two like bookends - they are somewhat meaningless without any books in the middle. Those books represent preparation, hard work, long hours, self sacrifice, discipline, and everything else necessary to achieve true success. A lot of times the bookends are more ornate than the books they hold up, which makes them more desirable to the uninitiated.
I must admit I have an insatiable desire to win and my human nature sometimes wants to skip all that hard work sandwiched between my desire and the fruits of victory. Each time I try to short-cut the process it ends in disaster. "I don't need to research that stock, I have friends making a killing off of it." I bought it, and I got killed.
In my own life I have found that the good life only comes after a great deal of preparation and toil. I'll let you in on a secret - after a while you learn to like preparation and journey more than the destination.
Life is a journey, we all need to learn to enjoy it.
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Each Friday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al. Articles I enjoyed reading included (in no particular order): Dividend Articles
Below are the carnivals that I participated in this week, along with a link to my article:
The Wealth, Money & Life Network Featured Articles
Other Articles
There are some really good articles there, please take time and read a few of them.
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It is good to periodically take a look at your holdings and the various sectors that you are invested in. My single largest sector is financials. It currently makes up 11% of my total investment portfolio. I like to limit any individual sector to 10%, thus I am slightly over-allocated. I am currently invested in six banks. I will be very surprised if I can make the same statement on December 31, 2008. Then again, I have been surprised several times over the last 18 months. At time of this writing, I owned BAC, BBT, MTB, RY, STI and USB.
Bank stocks make up a significant piece of my financials. For most of the year I held these banking stocks:Bank of America Corporation (BAC) -20.9%
The percentages above represent my year-to-date return (through 6/4/2008) for the period I held the stock. Not a pretty picture, for the most part. USB has been the lone bright spot.
BB&T Corporation (BBT) -2.5%
M&T Bank Corporation (MTB) +3.7%
Royal Bank of Canada (RY) -0.9%
SunTrust Banks, Inc. (STI) -20.1%
U.S. Bancorp (USB) +7.9%
Wachovia Corporation (WB) -30.7% -Sold 4/15/2008
In my article "Time is My Friend", I noted that I have too many bank stocks at six (seven with WB in my IRA). It was my desire reduce my bank holdings down to three to four stocks. Later the same month in my "State of the Dividend Address", I identified STI and MTB as my two weakest banks and moved them to "On The Shelf". I opted to wait and let the weakest bank stocks identify themselves over time before selling.
Fast forward to about a month and WB cuts its dividend. As per my policy, I immediately sell the stock. One down. Recently, MTB chose to leave its dividend flat at $0.70 and placed one foot in the grave. In an earlier stock analysis of BAC, I speculated it too would hold its dividend flat in September. As for the others:
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Below is a guest post by Sarah Scrafford.
Corporate ownership and private enterprise have been the buzzwords of developed economies for quite some time. Privatization has been a positive trigger for rallying stock markets all over the world. It was the sign that heralded the readiness of a corporate entity to meet the harsh and demanding needs of the private investor. But what makes a public company a headline stealer? It’s either the fact that the company has made castles in the air real for a multitude or, at the other end of the spectrum, because it has shattered the dreams of millions.
What is the factor that people use to differentiate between one good “investor-friendly” company and another? Great investors have long known that the only real sign of a great company or business is the amount of cash it can generate year after year. For the common investor, a rough estimate of this is the cash dividends that he/she receives on account of owning company stock - the higher the dividend, higher the return on his investment. But what makes a good company a great one?
Let’s look at two famous ones - GE and AT&T. Both companies have maintained the enviable and stellar record of never having missed a year in paying dividends. The icing on the cake for the investors in these two enterprises is that the dividends have been on the upward trend, continuously increasing from start to now. But the difference between these two and other companies lies not in the amount of dividends paid, but in the “Dividend Decision” itself.
The big question is - how much of the company’s cash earnings should be distributed as dividends? AT&T has always paid out more than 60 percent of its per share earnings and GE has sent out at least 35 percent year after year. Now the question arises - why don’t other companies follow the path that these two have chosen?
Classic theories state that the dividend decision taken by the Board of Directors takes into account all investment opportunities and then allocates capital to a place where it will hopefully earn a better return than it would if it were paid out as dividends. In simpler terms, it means that the company will pay out dividends only if it cannot find a new project or opportunity which would offer higher returns than cash invested elsewhere.
GE as a corporation operates in an industry where innovation can bring about or create a brilliant new chance to rake in the dollars. While AT&T pays out more because, in an aging industry where growth rates are nearing lower single digits, it cannot invest the money it generates to deliver better returns, GE can afford to retain its earnings and invest so that the pace of creating shareholder value is higher than the average alternative.
Coke and Warren Buffett have been in a similar marriage since 1988. Coke has an excellent record, just like GE and AT&T. But why did Buffet make more money than everyone else? In 1988, he bought Coke at an average of $4.75 per share. Today, the cash dividends alone amount to $1.52 per share. That's a cash return of 32 percent every year. And as long as Coke increases its dividend payout, Buffett only becomes richer and richer, at an increased pace.
To put it in a nutshell, if the stock markets didn’t exist, the only way an investor could earn from an investment is through dividends. It has thus become of utmost importance to find save haven in dividend-paying companies during the markets’ troubled times.
Sarah Scrafford is an industry critic, as well as a regular contributor on the subject of entrepreneurial finance. She invites your questions, comments and freelancing job inquiries at her email address: sarah.scrafford25@gmail.com.
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Last week in my the article "Who is Ben Grossbaum and Why Should We Listen to Him?", I profiled Benjamin Graham and his lasting contributions to the investing community. One of the metrics I look at when considering the fair-value of a company is the "Graham Number". The formula is as follows:Price = Square Root (22.5 x Book Value x EPS)
For Book Value, I use Tangible Book Value per share. There are so many odd intangibles (goodwill, customer relations, patents, licenses, contractual rights, etc.) that U.S. companies are now forced to record under purchase accounting that a pure book value could easily skew the calculation. Since Tangible Book Value is usually less than Book Value, the resulting price is generally more conservative. Thus, if a stock is ever selling below its Graham Number, my quantitative analysis will automatically give it a star for being fair valued.
For EPS, I am currently using a trailing 12-months. It has been suggested by some that I should be using an average trailing three years. This would help normalize any unusual swings in earnings, both positive and negative. My inclination would be to use the lower of the two, which would provide a more conservative result.
The 22.5 is a little more involved. Graham believed that the price-to-earnings ratio (P/E) should be no more than 15 and the price-to-book value ratio (P/B) should be no more than 1.5. He did note that a P/E ratio below 15 could possibly justify a higher P/B ratio. Thus, he used as a general rule of thumb that the product of the two should not be more than 22.5 (15 x 1.5). That is how the 22.5 is derived (15 x 1.5). The 15 P/E is a result of Graham wanting his portfolio to have a yield equal yield to that of a AA bond. Over long periods of time, AA bonds have yielded 7.5%, on average. The inverse of this yield is 1 divided by 7.5%, or 13.3 (rounded up to 15) became the target P/E ratio for his portfolio.
Like all calculations of fair value, the Graham Number should be considered with all other available information and not used in isolation when making a buy or sell decision.
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Linked here is a PDF copy of my detailed analysis of General Electric Company (GE) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: General Electric (GE) is a diversified technology, media and financial services company. With products and services ranging from engines, power generation, water processing to medical, financing, media and industrial products.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. GE is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, GE is trading at an 8.2% discount. A Star is added since GE is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. GE earned one Star in this section for 3.) above. GE has paid a dividend since 1899 and has increased its dividend for the last 20+ years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. GE earned one Star in this section for 2.) above. If GE grows its dividend at 7.8% per year, it will only take 4 years to equal the long-term average money market rate of 4.61%. GE's NPV MMA Diff is less than the $10,000 I prefer. However, since GE is a Blue-Chip company with a long track record of success, I am comfortable with its NPV MMA Diff of $5,862.
Other: GE is a member of the S&P 500, an Aristocrat and an Achiever.
Conclusion: GE earned a Star in the Fair Value section, earned a Star in the Dividend Analytical Data section and earned a Star in the Dividend Income vs. MMA section for a net total of 3 Stars. This rates GE as a 3-Hold.
In April, GE shocked the U.S. stock market by reporting a 6% drop in first quarter earnings and slashed its 2008 earnings outlook. During its quarterly conference call, Chief Executive Jeff Immelt blamed the miss on Bear Stearns near bankruptcy. "We had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales," Immelt said.
"We are not counting on the business getting any better, vis-à-vis...the U.S. consumer," Immelt said. "We have actually allowed for a worsening of the U.S. consumer in our GE Money business. So I think that is the way to think about the U.S. and the U.S. economy."
After the announcement, GE was pummeled in the market, dropping nearly 13% to $32.05 in heavy trading. Since then it has continued to slide closing Friday at $30.02. GE is widely acknowledged as one of the best managed companies in the world. For long-term investors the circumstances provide a good opportunity to initiate or add to a current position. I added to my position in early May and will continue to add to it as my allocation and GE's valuation will allow.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of GE (3.2% of my Income Portfolio).
What are your thoughts on GE?
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The giant meets the pack. We all like to see the underdog pull out a miraculous victory. In April, this giant took a body blow that not only stunned him, but stunned all that were watching. Like wolves, the pack turned on the beleaguered giant, beating it down unmercifully. The giant cried for mercy blaming the Bear for its weakened state. Will the giant return to its former self? Stay tuned...
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While waiting for this week's episode. You may want to tune in to a few of these classic thrillers:
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It is the first Saturday of the month, so it is time for a goals/progress update. My goals were defined in this December 1, 2007 Investing Goals post. Below is an updated version of the table found in the original post.Description Dividend
Income
AnnualizedYield
on Cost2027 Goal 110,000 20.00% 2017 Goal 30,000 10.00% 2008 Goal 4,000 4.90% Dec/2007 3,054 5.00% Purchases YTD 1,614 0.30% Div. Changes YTD 82 0.11% Sales YTD (120) 0.06% May/2008 4,630 5.47% Purchases 403 0.25% Div. Changes 21 0.02% Sales 0 0.00% Apr/2008 4,206 5.20% Net Changes 188 -0.06% Mar/2008 4,018 5.26% Net Changes 461 0.13% Feb/2008 3,557 5.13% Net Changes 277 0.14% Jan/2008 3,280 4.99% Net Changes 226 -0.01% Dec/2007 3,054 5.00% Net Changes 228 0.12% Nov/2007 2,826 4.88%
For the month, dividend income increased $424, and Yield on Cost (YOC) increased 0.27%. These changes were driven by new purchases and dividend changes (no sales in May). Let's examine each of the these categories:
Purchases: The $403 increase in annual dividend income and 0.25% decrease in YOC related to the following purchases (yield at the time of purchase):
SFI and AOD increased the YOC and was partially offset by a decrease from the GE purchases. I continue to expect YOC to drop monthly since most new investments will yield less than my current YOC, and dividend increases will not be sufficient to offset it.
Dividend Changes: The $21 increase in annual dividend income and 0.02% increase in YOC related to the following dividend changes (a=dividend stated in annual terms, q=quarterly, m=monthly):
Sales: I did not sell any income portfolio investments in May.
The next monthly progress update will be on Saturday, July 5th.
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